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Unfolding the MIC (Mortgage Investment Corporations)

Unfolding the MIC (Mortgage Investment Corporations)

Are you looking for other ways to enter the real estate market as an investor? One possibility that has gained in popularity recently is the MIC (mortgage investment corporation). The purpose of this article is to help you understand how these work and to help you decide whether this is the investment for you.

What is an MIC?
An MIC offers private mortgages on real estate properties. Their interest rates are higher than what the banks post, because they accept borrowers with a higher degree of risk, usually because of low credit scores and/or income verification issues. The corporations take their funding from individual investors, investor groups and banks, and those investing entities receive some of the return on the mortgage in exchange for their investment.

Structurally, MICs resemble income trusts, in that they sent all of the income to their investors. This setup allows the MIC to evade most taxation, allowing the distributions to be larger. However, the tax burden then passes on to the investors, but we’ll get into that more in a bit.

Where can you hold an MIC?
You can keep MIC investments in tax sheltered accounts, such as your RRIF or your RRSP.

How is MIC income taxed?
When you receive a distribution from an MIC in which you have an investment, it is taxed like interest income. So whatever your marginal tax rate is would dictate how much of each distribution will end up in the hands of the government.

How much do MICs deliver in returns?
Returns on MIC investments vary, just like any other investment. Remember that you are investing in mortgages that are extended to people who cannot qualify for lending from banks and other traditional lenders, so the likelihood of default is somewhat higher. After fees, many MICs deliver returns between 8 and 10 per cent. If the economy shifted into a recession, though, and defaults went up, then those values would likely be reduced.

What kind of fees do MICs charge to investors?
Based on current market conditions, the fees range between 1.75 and 2.00 per cent.

What are the best parts?
This is the easiest way to invest in private mortgages without all of the red tape that some other avenues toward this investment represent. You do however need to qualify as an accredited investor.

What is an accredited investor?
Let’s get to it – you may qualify as an accredited investor in Canada if you meet at least ONE of the following:

Income

Your net income before taxes exceeds $200,000 in both of the last two years and the income is expected to be maintained at least the same for the current year; OR

Your combined net income before taxes, with that of a spouse, exceeds $300,000 in both of the last two years and the income is expected to be maintained at least the same for the current year;

OR

Financial Assets

You or together with a spouse, own financial assets worth more than $1 million before taxe deductions but net of related liabilities.

What are the real drawbacks?
Most MICs ask for a fairly large chunk of money up front, with $25,000 as a common minimum. You also have to agree to leave it in there for at least three years. That would be more palatable if you had some guaranteed distributions or at least the initial capital, but you don’t get anything like that. It’s true that most investments don’t come with guarantees, but they also usually come with a lot more liquidity.

The elevated risk is also a factor to consider, but you’re investing in people’s residences. The last bill that the vast majority of people will stop paying is the bill on their residence, because they don’t want to end up on the streets. So while default risk is something to consider, if you look at the pre-screening that the MIC does before extending the loans, you should get a better sense of what actual risk you are facing.

Why are MICs so popular right now? What do investors need to know about them?
A lot of investors are tired of the low yields that many traditional investment vehicles are bringing, such as bonds and low-interest GICs. MIC units offer a higher yield, and so many investors want to switch over to those units. However, they may not be aware of the lack of guarantee that comes with that change.

MIC units come with a limitation to a particular asset class – almost always residential mortgages – and this limitation can elevate the risk. There are other ways to invest in mortgages that allow you to take advantage of different classes.

With popularity comes a drop in the yield. The elevation in investment means that each loan has more competition for it. As a result, the interest rates drop, as do the fees charged at closing, which is why investor returns have started to dip in this vehicle.

When MICs are looking for more loans to take on so that investors can make money, they could face the temptation to take on borrowers who have increasing poor credit and income history profiles. As a result, default risk increases over time. In some extreme cases, this could turn into a sort of Ponzi scheme, as the directors of the MIC turn to new investors to fund the promised returns to old ones, until the actual capital assets run out.

How do public and private MICs differ? Which should I consider?
This is a question that more and more investors are asking. Ontario is one province that has instituted limits on the securities market, one of which keeps many investors from buying private MICs, only permitting them to invest in ones that are publicly traded.

Publicly traded MICs have more stringent regulations, including their disclosure requirements. Publicly traded MICs are liquid because they trade on the TSX. Share prices are transparent. Eight public MICs provide access to a wide variety of high-yield investments. All of them provide quarterly reporting – and seven of them send out cash flows to investors each months.

Some private MICs do offer higher returns than their public counterparts. However, that higher yield can come from extending riskier mortgages. Also, when you take out administration costs and management fees, the yields can end up a lot closer than you might expect. So if you’re considering investing in an MIC, you would be well served looking at the publicly traded ones first.

Wrapping Things Up
At Amansad Financial, our core philosophy is that each investor should have total control over the money that he or she invests. We never pool funds but instead keep the link between one investor and one property, although we have moved into equal split syndication, so that investors have more flexibility but the risk is also distributed equally. Investors for the mortgages we provide do not require you to be accredited, but a KYC (Know Your Client) form is still needed. Are you an investor looking for “passive income” while remaining involved and knowing where all of your capital goes? Get in touch with us – or sign up below: